Apple-Led Tech Race May Buoy Air Rates Amid Weak Shipping

The cut in profit adds to evidence of how Europe’s economic slump and slowing growth in Asia are dragging on FedEx, which is seeking money-saving efforts such as buyouts for some employees. Photographer: SeongJoon Cho/Bloomberg

Sept. 14 (Bloomberg) -- A surge in the introduction of new
technology products, including Apple Inc.’s iPhone 5, is poised
to drive up rates for shipping by plane, benefiting companies
from FedEx Corp. to Atlas Air Worldwide Holdings Inc.

Apple, Google Inc., Microsoft Corp. and Amazon.com Inc. are
offering new smartphones and tablets as they compete for
customers in the fast-growing mobile-computing market. So many
devices shipping at once may spur a larger price increase than
the 20 percent jump after Apple’s new iPad in March, said Kevin
Sterling, a transportation analyst at BB&T Capital Markets.

“This is a new dynamic for the air-freight industry,”
Sterling said in a telephone interview from Richmond, Virginia.
“There’s been tech launches periodically, but there’s so much
hype around so many products at one time.”

The gadget convergence is a bright spot for air-freight
companies in a pre-holiday shipping season clouded by weak U.S.
job growth. Potential beneficiaries include companies such as
FedEx, which runs the world’s largest cargo airline, and Atlas,
the biggest operator of Boeing Co. 747 freighters.

Shipments of iPhones and tablet computers may reach as much
as 20 million pounds (9.1 million kilograms), said Satish
Jindel, president of SJ Consulting Group in Sewickley,
Pennsylvania. Strict pre-release security and short timetables
for delivery to retailers make air transport the shipping method
of choice, Sterling and other analysts said.

Controlled Hype

“The tech companies, they tightly control these product
launches,” Sterling said. “Apple doesn’t want someone getting
ahold of the iPhone5 a few days before, taking away from the
hype.”

The resulting crunch may push the average air freight rate
as high as $5 a kilogram this month, he said. The average in
March, when the iPad was released, was $4.44 per kilogram,
according to Drewry Shipping Consultants Ltd. July’s rate, the
latest available, was $3.82.

“We have kind of a perfect storm of new product
launches,” said Jim Corridore, a Standard & Poor’s equity
analyst in New York who covers transportation companies and
estimates that a rate increase may last through October.
“They’re all going to want to be expedited.”

Atlas, buoyed by iPad cargo earlier this year, applied
those lessons to get ready for the latest rush.

More Flexibility

“We anticipated there would be a number of these new
product launches that would support the overall demand for air
freight moving into what is traditionally peak shipping
season,” said Dan Loh, a spokesman for the Purchase, New York-based company. Atlas expects “an environment that would be akin
to what we saw back in March.”

In advance of events such as product releases, UPS Airlines
can add flights, increase the capacity of its facilities, or
farm volume out to 12 regional hubs, Mike Mangeot, a spokesman,
said in a telephone interview.

“It’s something that we know is coming, and we work with
the shippers to flex our operations and make it happen,” said
Mangeot, who declined to discuss specific customers.

Deutsche Post AG’s DHL Express, which is one of Atlas’s
long-term contract clients, also declined to comment on
individual customers.

“A number of these companies, when they launch a new
product, we are heavily involved; all the big brands,” Rob
Siegers, DHL’s president of global technology, said in a June
interview.

Sellout Speculation

Analysts say DHL may be a primary carrier for Apple, which
said earlier this week that pre-orders of its iPhone 5 would
start today, and the phone would be available on Sept. 21. The
Cupertino, California-based mobile-device maker today said
orders for the phone from its online store won’t ship for two
weeks, adding to speculation the new model has sold out.

Apple is also expected to debut a smaller, cheaper iPad
tablet by the end of the year, two people with knowledge of the
plans said in July.

Google started shipping its Nexus 7 tablet in July, and
Microsoft’s tablet computer, the Surface, goes on sale Oct. 26.

Amazon.com has four different sets of Kindle reader and
tablet devices on sale this year, with a high-definition and
regular 7-inch (17.8 cm) Kindle Fire tablet available today.
Larger models of the Fire are available starting Nov. 20, while
the Kindle Paperwhite e-book reader goes on sale on Oct. 1.

Brand New

“Everyone sees an opportunity,” said Will Stofega,
program director at researcher IDC in Framingham, Massachusetts.
“It’s a brand-new form factor. If you can compete with Apple,
you have a good chance to up your revenue. A lot of people feel
that the first implementations were not that great. The
operating systems and the hardware have matured, and this is now
or never.”

The release dates coincide with the traditional shipping
surge between Thanksgiving in the U.S. and Christmas, when
holiday deliveries boost sales. An array of new products
arriving in that period will bolster Asian carriers, too,
analysts said.

EVA Airways Corp. and Cathay Pacific Airways Ltd. will be
among the biggest beneficiaries because of the size of their
cargo fleets, ZheWei Sim and Mark Webb of HSBC Holdings Plc said
in a note to clients.

Capacity Cuts

The advantage for air-cargo shippers may be heightened by
capacity cuts made as global demand slackened this year.
Atlanta-based UPS reduced its Asian air network by 10 percent,
shrinking it to the size it was in 2009, and would face a lag
bringing capacity back online. FedEx said in June that it
retired 24 jet freighters to reduce capacity in its U.S.
domestic express segment and cope with sagging volumes.

“With capacity down and demand appearing like it’s going
to be fairly strong, rates will be very strong,” Helane Becker,
a transportation analyst with Dahlman Rose & Co. in New York,
said in a telephone interview.

Another complication is that air freight companies have
already secured contracts with high-profile shippers, preventing
them from taking full advantage of any rate increases, Jindel
said in a telephone interview. .

Not Enough

“The increase that would come from these items will have
some positive impact,” he said. “But it’s not going to be
material enough to change the fortune and earnings projections
of the companies that are going to handle it.”

Atlas Air, which provides crews and equipment for
customers, has more flexibility to raise prices than either UPS
or FedEx because it offers services on a charter basis as well
as long-term contracts, said BB&T’s Sterling.

UPS and FedEx won’t see “the material upside that we
expect with Atlas,” he said. Atlas Air’s first-quarter profit
of 51 cents a share beat the average estimate of 15 cents from
analysts, a boost that was “all March,” when Apple released
the new iPad, Sterling said.

Atlas is likely to benefit in the months ahead by adding
capacity-seeking customers through both long-term contracts and
charter customers, said Loh, the spokesman. “We provide a way
to participate in some of these new product rollouts,” he said.

The company is outperforming broader U.S. stock indexes
this year, while UPS and FedEx are lagging behind. Gains of 8.2
percent for FedEx and 2.1 percent for UPS through yesterday
compare with 16 percent for the Standard & Poor’s 500 Index.
Atlas Air surged 48 percent in the same period.

The stocks of all three companies may get a boost, even if
earnings don’t benefit equally, as investors in air-freight
companies react favorably to the crunch, said Becker, the
Dahlman Rose analyst.

“The goods will start to fly, and everybody always wants
the latest phone,” she said. “People are just waiting to see
what the new ones look like. They have to have one.”